Welcome to the Royal Philips Electronics Q2 results call on Monday 17 July 2006. For the introduction by Mr. Pierre-Jean Sivignon, all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. Operator instructions. I will now hand the conference over to Mr. Pierre-Jean Sivignon. Please go ahead, sir.

Pierre-Jean Sivignon

Good morning. Ladies and gentlemen let me first welcome you to this conference call for the Q2 results of 2006 for Royal Philips Electronics. I will make a few introductory remarks and then open up to the call to your questions.

This quarter has again been one in which we have seen more evidence of self growth and increasing profitability. Let me be more specific; the comparable growth for the company was an excellent 11%, with all main divisions contributing toward this figure. In fact, the lowest for any division was 9% growth. Overall growth in Q1 was 10%. These growth levels support our average annual target of 5-6%. The EBIT margin in the quarter was 4.8% compared to 2.3% in 2005. This improvement helps us move to the higher levels of margins that we have been forecasting. Please remember that Q4 is always our biggest. In medical systems, the comparable growth was 9%, which supports our annual target of 6%. It looks like 2006 will be higher than 6%. The 2% growth in equipment order intake with a growth of 10% for the first half year. In addition, the order intake for Medical IT was excellent. The margin in the quarter recovered from the relatively lower levels of Q4 and Q1, due to higher sales than expected, particularly in CE, ongoing efficiency actions and a €10 million release from provisions. We continue to expect the actual and percentage margin in the second half of the year to be higher than 2005 on a comparable basis.

In DAP the excellent quarter has given us a 13% comparable growth which supports our target of 7%. This very strong growth was in all product groups and was mainly focused in Europe and China. The underlying development of the margin was strong, we continue to work toward taking costs out of this division to liberate funds for investment, innovation and marketing.

The growth rate in Consumer Electronics was very high at 17%, which reflects the continuing move to flat screen television as well as our growth in peripherals and accessories. The margin in the quarter was 1.8% with only a marginal positive on the products. During the quarter, the market was oversupplied in anticipation of the World Cup demand. Consequently, prices were forced downwards to clear inventories in the channels. We however kept tight control over production and inventory and even managed to reduce our own inventory during the quarter. Inventories of Philips products in the channels at the end of the quarter were at an acceptable level. However, inventories of competitors and retailers remain too high. The situation will have a negative influence in Q3.

The Lighting sales growth was 9%, driven by UHT, special lighting and Lumiled, and this supports our annual target of 6% regular growth. The comparable sales growth of Lumiled was 22% above an already high Q2 last year. The Lighting margin was good and we continue to take costs out of this division.

The semiconductor sales showed a comparable growth of 12% and the sequential growth was in line with our expectations. The margin was 9.8%, which tells us that the business renewal program is continuing to produce benefits. Today I have no further updates to our press release of June 21 concerning the future of the semiconductor division, other than to say that all actions do remain on track. In other activities, we have announced the disposal of some businesses during the quarter and we are making progress with others. I expect that we will make further announcements soon.

The EBIT in the quarter was in line with our expectations. In analogue (inaudible), the expenses were less than what we originally told you. However, the Q4 costs will be higher, leaving the actual amount unchanged. The net debt in the quarter increased from €1.3 billion to €2 billion. This was mainly due to paying a dividend of €523 million, acquisition of €230 million and €118 million for buying our share to cover the stock options program. Consequently, besides that, it was a good quarter for cash flow. We have once again looked at immediate cash availability and needs and have come to the decision to announce the further share buyback program of €1.5 billion. The inventory percentage of 12.2% is 1.2 percentage points lower than one year ago and we consider this an excellent performance. You remember that Q2 last year when we did have a bit of a problem and you can see that this year we are actually down.

There are still one or two areas where the inventory to sales ratio can be improved, which we are working on. The results from non-consolidated companies reflects the lower results of LG Philips LCD which were anticipated. There were some items that you must take into account when forecasting the results for the coming quarters and the main ones are: we expect the sales growth in the second half of the year to be slightly lower than in the first half, due to the particularly strong second half of 2005. In Q3 2005, the CE results included the €156 million gain on the TPV transactions and nothing of this nature would be in Q3 2006.

Also in CE we expect the Q3 margin to remain under more pressure than is normal as we saw in Q2. In Medical, we are making the assumption that the Intermagnetics transaction will close in Q4, which will create charges in that particular quarter of approximately €85 million. In other activities in Q3, we will have some higher costs for R&D, due to the trend spending nature of the brand campaign we expect Q4 to be approximately 70% of the annual investments. The TSMC stock dividends will be included in financial income and expense in Q3, to the extent of approximately €90 million. Q4 2005 included €187 million released for the (inaudible) provisions for medical benefits and this will not be repeated.

Let me now open the call for your questions.

Questions and Answers

Operator

Thank you, sir. If any participants would like to ask a question, please press the * followed by the 1 on your telephone. If you wish to cancel this request, please press the * followed by the 2. If you please limit yourself to one question with a maximum of one follow-up, this will give more people the opportunity to ask questions. If you are using speaker equipment today, please lift the handset before making your selections. There will be a short pause while participants register for a question.

The first question comes from Mr. Nav Sheera from Lehman Brothers. Please state your question, sir.

Q - Nav Sheera, Lehman Brothers

Thank you very much. Good morning, gentlemen. I just wanted to start off with regard to Medical Systems. It’s obvious that you’ve done quite a lot of things right in terms of improving the margins. Also in the press release, you said that you were working on structural improvements and operating efficiencies. Am I right in assuming these are still ongoing, which would imply there is still upside to the ISO percentage margin for Medical going forwards? Then I have a follow-up on semis after this. Thank you.

A – Pierre-Jean Sivignon

Yes, I think you could say that. We had the – you know the story, yes? We had three softer quarters. You were expecting some rebound. We had a view on the rebound on the second half and we said that, like for like, the second half Medical margin of 2006 should be better than the one of 2005. We confirmed that today. This second quarter is indeed starting to benefit from these operating improvements. One of them being the control of selling expenses. As you remember, we had higher selling expenses in Q4 and in particular in Q1, in particular to address the very strong growth of activity in some parts of the world. So I would say yes, your assumption is correct.

Q - Nav Sheera, Lehman Brothers

Thank you. The second thing is on semiconductors. Do you see any pockets of weakness, inventory build up, over supply – not necessarily in your own business but in the supply chain, especially in the CEMs(?) contracted for manufacture. Anything which might allude to you that there could be something with regards to either temporary slow down of the industry build during the process?

A - Pierre-Jean Sivignon

I think the answer is no. Let me say two things. We, as you know, and I mention it every quarter: the visibility we have on the business continues to be extremely short sighted. As I’ve explained a couple of times, we pretty much have six weeks, maybe seven weeks at best, of visibility. Nothing has changed, that is the kind of situation we have been in previous quarters. That is one. The second thing is the Sidex inventory is down. I think you saw our performance on the overall inventory of Sidex and our semiconductor inventory is actually participating through this improvement. The third thing, which is your question beyond the Philips inventory, what do we know of semiconductor inventory in the channels? I did check on that, actually, over the course of last week and what I understand is that this level of inventory is actually quite reasonable. I’m not hearing that there is surplus inventory in the channels beyond the strict inventory of Philips.

Hi there. First question would be for the Consumer Electronics and I’m going to follow up on medical. In Consumer Electronics, could you basically help us clarify some of the underlying margin dynamics? In particular, whether the decline in LCD panel prices should result in you benefiting from better pricing conditions going forward? And if so, when will your negotiated prices kick in? Also, whether you could see some marginal help from negotiating your EMS contract terms or (inaudible) find(?) your EMS base as of November, when the year contracts would have expired?

A - Pierre-Jean Sivignon

Okay, Nicolas, I think the point there is that, as you know, I think there have been and might be some – while the surplus inventory is being taken care of, there might be some leverage for us to negotiate a better price and we’ll certainly use it. But as you know, the nature of the model is precisely to keep us away from those constraints and basically act as a pass through between the suppliers and the end customer. There will be some opportunities, but I don’t think that changes the nature of the guidance very much, as well as the nature of the model. That’s the answer for the prices on panels. As far as EMS is concerned, which is your second question, we will renegotiate as normal when the Chebam(?) contract expires in November. That’s as much as I can tell you at this particular point on this particular question.

Q - Nicolas Gaudois, Deutsche Bank

So with that in mind, Pierre-Jean, would you confirm that the 4-4.5% targets for CE could be changing this year?

A - Pierre-Jean Sivignon

I would say at this particular point, we might be slightly shy of 4%. Slightly, I’m not telling you – the 4-4.5% is still very much our target, given that Q2 and the fact that there is a little bit of inventory not in our channels, but as I said in my introduction speech, with third parties and you’ll see that industry was indeed struggling a bit. But I think on models there, clearly one more time is showing that’s the right angle and our competitors will have to eliminate their inventory. So it’s slightly shy, Nicolas, but things (shifting from before?), maybe slightly shy.

Q - Nicolas Gaudois, Deutsche Bank

Okay, great. A follow up on Medical. Obviously even sifting out this €10 million provision, again a pretty good trend underlying. Will this change noticeably year over year and QoverQ in terms of services versus equipment revenues and was this part of the reason we saw…

A - Pierre-Jean Sivignon

No, I think that will be no. By the way, that’s a perfectly good answer to give. When you look at the details you will see that, if anything, the service business has grown at a stronger pace than revenue from equipment sales, which obviously is where we want to be in a way, for the future. The (service has grown a bit?), which I think is what you want to hear as well. The revenue mix all in, besides the fact that on the equipment side, the CE was startlingly strong – strong to the point that we disclosed it in the press release. The underlying improvements were the actions that we started back in 2004. You’ll remember we discussed those at length with you. They’re starting to show some results. There has been no real, major screen in the mix beside that, instead of a normal quarter in medical, besides the work that has been done on the margin.

Good morning. Revisiting some of the comments that you made at your semiconductor analysts day last year, you guided for some operating profitability between 5-15%. You also gave some cost saving targets of around €250 million by the end of this year. Could you give us an update on how much of those cost savings you have achieved to date? And what the target it going forward?

A - Pierre-Jean Sivignon

I think as far as the guidance on the semiconductor is concerned, as we know we normally don’t give guidance for the margin. We’ve guided you on the sequential growth, high single digits sequentially. I think you’ve got that in the press release. As far as the business renewal program is concerned, the numbers we gave to you in particular for depreciation when we talked about that, I think we guided you precisely with a drop of about €100 million for the year. I think in terms of reduction, I think that is very much concerned. I think anything we might have told you, including those particular comments, I think all of that is on target. As far as the overall guidance, which was, if you remember, a three-year guidance as part of the business renewal plan, which was actually ending by the end of 2007 and there we had guided you on the €450 million for that period of time, we absolutely confirm that for 2007. I think the precise one we gave was on depreciation, and I just renewed the guidance just now.

Q – Simon Schafer, Goldman Sachs

Great, thank you. Then on the order intake in the medical business, were there any trends that you may want to note on regional? Is there any trend towards order intake in the emerging market region? Or is it more concentrated on the developed world?

A - Pierre-Jean Sivignon

No, actually I think to give you an idea, and I think we disclosed that, our revenue was 17% in Asia in Q2. I would say it’s not a surprise any more. That trend has been very off. Or that glitch, I should say, more than a trend. It’s a glitch more than a trend. It’s almost since Q3 2005 and in terms of incoming orders, now that it is established and confirmed, I don’t really have to – it was probably the piece of news in Q3 last year. I think to then I will start with our revenue mix in terms of geography.

Q – Simon Schafer, Goldman Sachs

Great, thanks very much.

Operator

Thank you. The next question comes from Janardan Menon from Dresdner. Please state your question.

Q - Janardan Menon, Dresdner Bank

Just to go back to an answer you gave to an earlier question, you’re saying that your services revenue in medical grew faster than equipment, did I hear that right?

A - Pierre-Jean Sivignon

No no, I didn’t say that, I said the equipment sales, given as you saw that Medical is up 9% for the revenue like for like and the point I was making to a question, is I think Nicolas Gaudois was asking me is your margin going up as a result of a change of revenue mix and my specific answer was – and I was talking sales – I said no. In this particular quarter, revenue coming from equipment sales grew slightly faster than the service revenue. That was the answer in terms of revenue mix. The one thing I added was the service percentage margin did slightly improve over the quarter. Those were the facts.

Q - Janardan Menon, Dresdner Bank

Sure, thanks. In your semiconductor order intake, you’ve said that orders came from Europe primarily a 5-10% order growth in Europe. Does that mean that, you know, it wasn’t wireless related but more sort of consumer automotive? Can we make a call like that?

A - Pierre-Jean Sivignon

Yes. Actually, right now, of course as you know it changes every particular quarter. The strength right now is definitely automotive, RFID including identification, I think in this particular quarter I think COM(?) was doing better as well.

Q - Janardan Menon, Dresdner Bank

The last one, a clarification on consumer if I may. How much visibility do you really have on what could be your margin in Q3, which is you are guiding at a weaker margin, which presumably implies a loss in main stream consumer electronics into Q3? But it is a sort of a slippery slope, which is that if LCD panel pricing continues to fall very rapidly, is there some chance that despite your model being fairly robust, you could end up with a larger than expected loss like you did for instance in Q3 2004 in a similar situation?

A - Pierre-Jean Sivignon

No, I think we trust our model. As you know, because you’ve just implied that Q3 is always the weakest of the three quarters for consumer electronics. Q4 is the strongest. But to your question, do we trust our model? Yes. To the earlier question from one of your peers, in terms of guidance for the year, because I hate to guide you on Q3, we’ve not done it and I won’t do it this time because I think we normally only guide you on the quarter margin. Guidance is a year end guidance, to the question that you seek to your 4-4.5%, my answer is a little bit shy of 4%. I think that the answer to Q3 is almost included in that answer in the year.

Q - Janardan Menon, Dresdner Bank

Thank you very much.

Operator

The next question comes from Mr. Jonathan Crossfield from Merrill Lynch. Please state question, sir.

Q - Jonathan Crossfield, Merrill Lynch

Good morning. Our first question would be on Medical orders growth of 2%. You’ve had a number of quarters in the high single digits and then teens, growth rates. Is there anything going on there in terms of the wider market, or is it specific areas of the business? I know Nuclear Medicine was down and MR was up.

A - Pierre-Jean Sivignon

No, actually, it’s a good question. I looked at it to prepare for this call and I actually looked at the quarterly incoming orders growth year on year per quarter during the last two years. Actually, the last two and a half years. I was checking because we’ve had so many quarters above 10% and actually, if you look at the history, we had two quarters with single digits in the course of the last two and a half years. Is there anything to conclude from that 2%? No, because it followed an extremely strong Q1 and if you remember a pretty strong Q4 last year. That’s all the percentage, so don’t read anything. As far as buy modality, there is no trend there either because if you look at it, one modality can be pretty strong for one particular quarter and another modality would be slightly weaker the following quarter. If I want to give you a little bit more, I will tell you that as far as Q2 is concerned, MR. Let me give you one piece of information, MR was strong in terms of equipment orders in Q2 of 2006. That may be one bit of information in the modality mix in terms of incoming orders in Q2.

Q - Jonathan Crossfield, Merrill Lynch

Okay, thank you very much. Then just as a quick follow up on the buyback, is there any particular reason for announcing this marriage as simply the cancellation of the shares? And does this affect or is there any change to the target gearing that you have for Philips in the medium term?

A - Pierre-Jean Sivignon

No. It’s two separate questions, right, and let’s treat them separately. Why announcing it now, well actually if you look at last year in mid-August, we announced a share buyback. We said it would be in the period of 18 months. We completed it if you remember in the course of Q1 2006 and we told you as well that we cancelled the share, which I think is a very important announcement. We got the shareholder meetings to vote for that cancellation. We (actually led you to that?) cancellation and we completed that cancellation literally a couple of days ago. So to come to your question, the reason why we announced it now is because it’s basically on the day almost following the completion of the cancellation of the previous €1.5 billion program. So that’s the answer to timing. Your second question was on?

Q - Jonathan Crossfield, Merrill Lynch

Just is there any change – in the past you said it could Philips could bear up to about €5 billion as debt. Is there any change to that?

A - Pierre-Jean Sivignon

I think what we said was that we were guiding our share of discipline in terms of balance sheet and hearing towards an A-rating. I think we’ve completed that A-rating in Q1 with a second institution. We already had it with a first one. And we said that there was no change there in terms of objectives and we said as well that we would re-discuss all the issues post-semiconductor move, but for the time being I think absolutely nothing has changed.

Hi, I had a few hopefully quite quick questions. The first one was, in terms of what you were saying to look out for in the second half of the year, did you say that within Medical, included in Q4 of last year, there was a provision that was released due to – I wasn’t quite sure. Could you just give some clarity as to what that was?

A - Pierre-Jean Sivignon

No no, you’re talking about Q2, not the second half, aren’t you? I just want to make sure.

Q – Simon Smith, Citigroup

No, second half. I thought in the things to look out for that within Medical, the final point you’d mentioned was something to do with Medical, a provision that had been released. Is that right?

A - Pierre-Jean Sivignon

No, let me be totally precise. On the Q2, I did mention that in the books for Q2, because there was a strong improvement to the margin of medical, and I said that includes a relief of €10 million. That’s a relief of provision in Q2 of this year. Now to the second half of this year, I did mention as well that in the course of Q4, we would have a one-off purchase accounting in that on the back of the Intermagnetics acquisition at the tune of €85 million. Those are the specifics.

Q – Simon Smith, Citigroup

Sorry, I mustn’t have heard you. The other thing, in terms of DAP, you’ve obviously given us that guidance as to the Intermagnetics impact, but in terms of Avent, is there some sort of guidance as to the impact there of purchase accounting?

A - Pierre-Jean Sivignon

As far as I think Avent’s purchase accounting is concerned, basically on that particular one, it should be in the course of… The closing is expected in Q3 and it’s going to be minimal. I would say, if you want numbers, probably €5 million, equally spread between Q3 and Q4. That’s for Avent. Just before – to be totally thorough and maybe that’s what you were alluding to – last year we had a one-off in Q4 2005 on MedQuist. If you remember, we took a one-off provision for litigation in Q4. We certainly don’t plan to repeat that this year.

Q – Simon Smith, Citigroup

Absolutely. Thank you. Just in terms of semiconductors, obviously you’ve said there’s nothing to add in terms of negotiations and where you stand there. But you’d always said that you would have that business as a separate legal entity in Q3. Would it be safe to say that as of now, those separate accounts for that business have been established, and so any negotiations would be set on definite numbers from your side?

A - Pierre-Jean Sivignon

The answer is yes, but I want to bring a caveat. We always said that of the two processes, there was one which was a negotiation, the second one was a legal carve out. They’re two separate projects and you don’t have to wait until you have a complete carve out to actually engage in negotiations. The answer is the deadline for Q3 for the legal separation absolutely is confirmed. Are we are negotiating in the meantime on what I would call final numbers? Yes. Please, the two things have been distinct for a while.

Yes, good morning. I’d like to have a clarification on the contribution from acquisitions in the Medical Systems division. If I look at the order data, the nominal sales growth is exactly the same as the comparable sales growth. I’d like to understand what kind of contribution we had from Stentor and Biomedical during this quarter, because this looks like there’s nothing from them.

A - Pierre-Jean Sivignon

Okay. Let’s start with Witt. I think Witt is slightly shy of €10 million and if you look at the revenue of Witt, you’ll see that there is actually already some growth there compared to the year. So that’s on the back of Q2, which is the first quarter where we have Witt on board. As far as Stentor is concerned, you have to realize that the business model there is totally different from the one we had before with our own licensed business. Before, we were selling licenses one-off when we were selling our batch(?) licensed product. On Stentor, we don’t sell more up front, but we sell on a pay-per-use every time the radiologist is actually using the system. We have a threshold which is guaranteed and we have a commitment then from the radiologist that they will use the product for a certain number of years. I would say that to compare the revenue of Stentor in terms of revenue accretion so early in the game is not really fair, because it’s a completely different business model. That being said, Stentor has actually contributed still to the revenue of Q2 at the tune of €60 million. Again, I’m giving you the number because you asked for it, but the reality of it is in the meantime, we are filling in the pipeline with very good incoming orders for their batch(?) products, with more and more radiologists which are committing to these products for actually the next few years. Because people are finding with us, just not for a license but now they are committed with us to the minimum level of purchase on the years to come. That’s the model of Stentor.

Q - Thomas Brenier, Societe Generale

And you think you could be in a position to give us a very general idea of what could be the revenues for the full year?

A - Pierre-Jean Sivignon

For Stentor, I could – I think I could give you something in the region of for the year, I would say €70-80 million. But again, please do not confer that to… It’s not the sale of licenses. I mean, I can only repeat myself, it’s actually only pay per use. So in reality it’s almost an income stream which is guaranteed and of course, with increasing that, the more we sign in. As far as Stentor is concerned, what is really interesting is more incoming orders and the contract signed for batch(?) contracts with key hospitals, rather than revenue. But anyway, you want revenue, I’m giving you (inaudible).

Q - Thomas Brenier, Societe Generale

That’s very helpful, thank you. I have a very detailed question on the semiconductors division. I’ve noticed that the number of employees has increased by something like 4% sequentially and it has been quite stable over the past few quarters. I was just wondering if there was anything that you wanted to comment on that? Anything linked to this question of the business, maybe?

A - Pierre-Jean Sivignon

As you know it’s an industry where you put a lot of trust in your workforce – it’s just an expression of the very strong activity. You saw that our utilization rates stand at 88%, which is extremely high, and I wouldn’t read much more. It’s just, I would say the headcount illustration for the current level of activity.

Q - Thomas Brenier, Societe Generale

Thank you very much.

Operator

The next question comes from Mr. Luc Mouzon from BNP Paribas. Please state your question, sir.

Q – Luc Mouzon, BNP Paribas

Hi, good morning, Luc Mouzon from Exane BNP Paribas. Just Pierre-Jean, to come onto the beginning of the call, you say that you are well on the way to deliver on the upper range of your guidance. Were you talking about the 6% organic growth rate or were you talking about the 7-10% of EBIT margin for the group? My follow up is about CAPEX trends. Could you update on the CAPEX trend, as we have seen Q2 remains a bit strong. What part of this CAPEX is semiconductor related? Thank you.

A - Pierre-Jean Sivignon

Okay. I think on my guidance at the beginning of the call, I was referring to the revenue guidance, where we said 5-6%. You’ve seen a couple of strong quarters, so I’m saying that the 6% - I think we will exceed the 6% on the complete year, even though as you know, the second half of last year was of stronger quality in terms of revenue growth than the first half of last year. So the guidance there was related to revenue. As far as EBIT margin is concerned, the objective of being at a cruising level of 7% by the end of the year, from that I’m not seeing more. Clearly, in the first half, our guidance on EBIT margin, no, we’re not changing that. To your question on CAPEX, I think basically let CAPEX – I have guided you on €1.1 billion for the year. We might be slightly north of that, slightly north of it for the year. As far as semi is concerned for the year, probably around a little bit north of €400 million for the year.

Q – Luc Mouzon, BNP Paribas

Okay, thank you very much.

Operator

Operator instructions. Please limit yourself to one question with a maximum of one follow up. This will give more people the opportunity to ask questions. One moment please, for the next question. The next question comes from Mr. Jonathan Dutton from UBS. Please state your question, sir.

Q – Jonathan Dutton, UBS Warburg

Just wanted to get a bit more detail on the iSite platform, what your plans are for rolling it out in other areas outside the US and the second follow up question, in terms of the revenue contribution from the acquisitions you’ve made in the past 18 months, Witt and Stentor, what sort of top line and margin impact should we model for 2007 from these acquisitions?

A - Pierre-Jean Sivignon

Okay, iSite, currently going full speed in the U.S. I think we said in the press release that we had scored some quite significant wins in the first half and in particular Q2, so there we would say the trend of the last two quarters, as far as the North American market is concerned, definitely confirmed. We are spending quite a bit of money up front right now to deploy the product in Europe, so we certainly have an agenda to start selling iSite in Europe. It’s not today showing on numbers. I couldn’t get exactly which particular (platform will launch?) in Europe, but it’s certainly soon to come. We are absolutely dedicated to launching that product on some scale in Europe. To your question on the revenue accretion and potentially impact of margin of both Witt and Stentor, in a previous question I think I guided you on the revenue. I mentioned €70-80 million for Stentor. On Witt, which as you know only started being consolidated in Q2 2006, there I would say guidance to the tune of probably I would say €45-50 million. Around those numbers. If you compare those numbers to the year before as much as you can, because you would have to reconstruct that for the complete year for which you will see peer growth and for Stentor, as I said, it’s very difficult to compare to the year before given that we have completely changed the business model there. As far as earnings are concerned, I think we’ve guided you on the Infomatics guidance. We said that we would start being positive there with some contribution in the latter part of 2007. I think that’s a guidance we gave to you on Stentor and more generally speaking in EFKA(?) Infomatics I confirmed that guidance. As far as the guidance of Witt is concerned, I think Witt will start being accreted immediately but as far as Witt is concerned, you will agree with me that it’s not very large. We will keep you posted on the progress.

Hello, good morning, it’s Francois from Cazenove. Just a quick question about DAP, what are the current margin targets? Because if I remember last quarter, it was for 15-16%. Is it going to be less than 15 then this year? Because of Avent?

A - Pierre-Jean Sivignon

No, actually in the case of DAP, we have actually split health and (inaudible) as you saw, where we basically now disclose the new territories and I think we updated you, if you remember, at the medical conference, saying that we were kind of creating a separate line to isolate what we like to call home care, which has a stronger service content and which is really dedicated to taking care of people at home. That is essentially today a lifeline and there is more to come. On the rest of DAP, I think the guidance is still very much 15-16%.

Q - Francois Meunier, Cazenove

Okay. And could you please give us the amount of license income in Consumer Electronics just so we can compare? Because it’s a number you usually disclose.

A - Pierre-Jean Sivignon

I think it’s in the text. In a moment of weakness, we fully disclosed it but I will tell it to you again. I think it’s €45 million.

Good morning. I’ve actually got two questions, one on CE and one short follow up on Medical. On CE of course, you mentioned that margin pressure is of course also being there in Q3. Still, you’re convinced on the strength of your business model. Do you feel that you have to take extra steps to maintain your longer-term margin between 4-4.5%, given the fact that if the (inaudible) is a bit stronger, then you would expect the margin you lose on that is hard to regain. My follow up is on Medical: just to be clear, could you give us the actual comparison base, basically the EBIT number you’re using as a comparison base for the second half EBIT, the Q3 and the Q4 number? Those are my questions.

A - Pierre-Jean Sivignon

Good. On Consumer Electronics, the first part of your question, are we continuing to work on the model? Yes. I think the deployment of the model I would say is probably complete in North America. We still have some improvement planned in particular in Europe, but I would say the recipe, the business model is fully programmed and is largely in place in North America. So can we still create value there? Yes. Now to your question, will there be additional pricing pressure in the second half and will our business model resist? Yes, actually. You’ve seen that on the second quarter, under pressure it certainly held up. Will there be continued pressure in Q3? I did mention that some competitors might have inventory still to clean up. As far as Philips is concerned, inventory was down so not to worry there. Could our competitors have something up? Yes. On the other hand, there’s always the same answer to that question. Our model is indeed, what has taken place in Q2 will take place in Q3. Our model will protect us there again. But I can only repeat what I said on the guidance from earlier, which is a slightly shy of 4%, showing that it not only does all that, there is still value being created in a couple of regions where we can still improve it. That’s as much as I can tell you there. On Medical, I think the guidance we gave to you there was that we said, and I think the guidance we gave is that the margin of the second half should be, excluding the one-off, which is essentially last year there was the MedQuist provision and the specific purchase accounting which relates to the various acquisitions we’ve done during the two years. If you exclude that, we did mention that our margin would be up indeed in the second half year on year. And we did mention as well that along the same criteria our margins for the complete year would be also up year on year. I think outright, maybe Alan could go through the various one-offs so we make sure we don’t get confused, I think, because they seem quite clear, but we are quite prepared to go through them. That’s the guidance we gave to you and we stick to it. If anything, Q2 is a bit ahead of the game and certainly of the consensus that you had.

Q - (Neil Dispar, Lavo Securities?)

And a short follow up maybe, if I calculate the tax rate and I exclude the TSMC dividend, which I assume are tax free, then the tax rate comes out a bit higher than I had been looking for. Are there any specific reasons for that?

A - Pierre-Jean Sivignon

Well I think TPV might have an impact in terms of potentially deteriorating it a bit, but I need to look at that. By the way, TSMC is not completely tax free. TSMC is a 10% tax rate. So I don’t know, if you run your math by applying 10% to TSMC, you might find your numbers back. I am struggling a bit to find an answer to that because I’m not really aware, so if you put TSMC with 10%…

Q - (Neil Dispar, Lavo Securities?)

But the €223 million you mentioned in the press release, that was after tax? That’s an upper IU(?), so that should be after tax.

Good morning Pierre-Jean. Just basically one question on other activities. I think you indicated earlier this year that the ADP loss would be similar to that of 2005, around €270 million. I think in Q2 you are a bit ahead of that, a bit better, basically. I was wondering if we should expect something a bit lower in terms loss. Even the divestments that you indicate in your press release coming into the second half, I was wondering if you could share with us your thoughts in terms of improvement of the losses in 2007.

A - Pierre-Jean Sivignon

If you look at our press release, we guided you as much as we could on other. I think this share will see a little bit of ups and downs in that basket because of the contents of that basket and also I don’t see too many positives on Q3 and Q4. The important thing is I absolutely confirm to you that we should be down. I think when we started this accelerated (inaudible), I did mention that by the end of 2006 we would have been 0-5 (inaudible) possible to zero by the end of the year. I think today I can confirm that. You will see that in Q2, you will still see a little bit of turbulence in Q3 and Q4 with more announcements, which mean that looking forward next year, we should really see a minimum (inaudible). That’s really what’s important for the future.

Didier Scemama, ABN AMRO

Thank you, that’s very helpful. If I may just have a follow up on semiconductors, I don’t know exactly how much you can talk about that and I think I tried to ask this question last quarter during the conference call. But in the wireless space, can you talk about when you’re going to start shipping your merged solution for 3G?

A - Pierre-Jean Sivignon

Didier, the answer is I don’t know. To be honest. I can come back to you offline on this. I know you want a precise answer. If you don’t mind, I’ll give it to you offline. I don’t know the precise date.

Thanks. I was just wondering if you could give any color on what the bookings environment in the semiconductor business or semiconductor sector – how the booking environment looks right now as we’re starting off Q3. Thank you.

A - Pierre-Jean Sivignon

I think I touched on that. We don’t see slowdown. I think we are in the situation that we were, as you remember, as the same conference call a quarter ago. Very little visibility, the usual 6-7 weeks, so I am in exactly the same situation we were at a quarter ago. I think what has changed is that maybe the fit in terms of business is probably a bit more on the multi-market as well as on the automotive and RFID and identification. That’s probably more the flavor of the day. The other thing I want to insist on, because that is a fact – all inventory is down. To another question, I can only reiterate that asking a few questions around the electronics, the semiconductor, the pipeline, of our customers, it seems to be okay as well. So no surplus inventory at Philips and as far as we understand, no surplus inventory either in the pipeline (inaudible). That’s what I can tell you.

Q – Matt Gable

Okay. Thank you very much.

Operator

Thank you. We have a follow up question from Mr. Thomas Brenier from Societe Generale. Please state your question, sir.

Q - Thomas Brenier, Societe Generale

Good morning again. I just want to have maybe a final comment on the order intake for Medical. You said that it would be soft to some growth, if not the trend you were seeing going forward. Should we expect this to be the bottom of the year? Do you already have visibility on how the order tunnel will look for Q3 and maybe Q4?

A - Pierre-Jean Sivignon

No. It’s hard to forecast that as you know if anything. What I can say is that that 2%, which again follows two pretty strong quarters, basically shouldn’t be taken as a huge trend and I would say that this year, we should still see for the complete year a level of incoming orders which would be north of the revenue growth.

Hi, thank you. I actually had a question concerning the HDTV penetration, in particular in Europe and also concerning your set-top box business. I remember a couple of months ago there were shortages concerning the boxes and everything. What are you seeing right now? Are the boxes well received? Is the penetration progressing? What would you say?

A - Pierre-Jean Sivignon

I think the thing is, in Q2, the technology was a bit late and did not impact as much as planned, essentially because of some delay. But the deployment of the technology will definitely take place in Q3 and you should start to see the needle move in that Q1. So nothing in particular, a bit late compared to what we had anticipated in Q2, and the deployment will start in Q3 with an impact of course on the televisions, which are capable of accommodating that particular quality of signal and an impact as well on the business in set-top boxes.

Q – (Gunther Hollberger?), HPD

Okay, great, thank you very much.

Operator

Thank you. The last question comes from Mr. (Bernard Vogel Sang?) from the Telegraph. Please state your question, sir.

Q – (Bernard Vogel Sang?), The Telegraph

Good morning. Mr. Sivignon, in your introduction, you were talking about taking costs at DAP and Lighting. What kind of actions are we talking about here and are they part of the plan to save €500 million in costs by the end of 2007?

A - Pierre-Jean Sivignon

The €500 million was the plan which was essentially touching expenses and I would say essentially costs out of what I would call the direct cost. In DAP, some of the initiatives are indeed included in the €500 million but they go beyond that. They include as well local sourcing, they include as well actions which relate to the value chain, to producing in the right country, to keeping the right amount of added value on board so it goes beyond I would say the strategic initiative which are included in the €500 million. The €500 million is very much related to expenses and indirect costs, DAP has a plan which goes beyond that. We also have initiative in the direct costs part of the income statement.

Q – (Bernard Vogel Sang?), The Telegraph

Thanks.

Operator

Thank you, Mr. Sivignon, there are no further questions. Please continue with any further points you wish to raise.

Pierre-Jean Sivignon

If there are no further questions, I think I just want to rate the rates at the end of Q2, and it’s probably a comment which somewhat includes Q1. Clearly firing on all cylinders. Growth in all product divisions, you saw nothing south of 9% so I’m sure you’ll agree with me that’s a pretty strong quarter in terms of revenue growth. Good improvements in Medical margins. I know that there were some set pieces in there, particularly lots of work done and a good improvement. We certainly take some price there. As far as the share buyback, I think it’s a tax free move, it’s basically looking forward at the continued discipline in capital allocation and technical views and I think that’s an element as well which we want to emphasize. At the end of the 12-month period during which we invested north of €3.5 billion in acquisition. One final point, if I may, which I would like to emphasize because it doesn’t necessarily get a lot of press coverage: it’s the level of inventory. I joined Philips exactly a year ago and I remember that at the end of Q2 we had a bit of an incident on inventory if you remember. Our inventory at the end of Q2 last year, we were in a little bit of trouble. If you go back to your notes and if you look at the inventory of Q2 2006 which is exactly a year later, you can see that we’ve gained 1.2 percentage points, which if you calculate it in relative terms is quite significant. I can tell you that all our product divisions are inventory expressed in percentage terms come down, with the exception of one and that is to say that, even though we’ve gained 1.2 percentage points, we believe that we still have room to improve on that particular domain. Besides that, I wish to thank you for your attention and your time and say goodbye.

Operator

This concludes the Royal Philips Electronics Q2 results call on Monday 17 July, 2006. Thank you for participating, you may now disconnect.

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